President Lula this week criticized the idea of an independent Central Bank. “It’s silly to think that an independent BC president will do more than when the president was the appointee,” he said.
What Lula disapproves of in the BC’s actions is the conduct of its monetary policy to contain inflation. In his view, the high interest rate, the main instrument of this policy, ends up having a high social cost by inhibiting a more robust expansion of the economy. The country, emphasizes the President, needs to grow and distribute income.
Although the premise is correct, and in line with the values of the new government, an independent BC is not a stumbling block to socially just development – and, of course, it is far from being silly.
Lula has taken the debate personally. She demonstrates irritation with those who charge her commitment to fiscal responsibility on the grounds that, in her first two terms, she squandered austerity, reducing internal public debt and producing surplus foreign exchange reserves.
This is a feat that should not be overlooked, as if it had just been the result of the luck of having governed in a period of particularly favorable international circumstances. But the point is that fiscal responsibility, like monetary responsibility, cannot depend solely on personal commitment. It needs to be enshrined at an institutional level.
Now, the autonomous BC that we have in Brazil is precisely one of the institutional instances that guarantee the stability of the economy beyond the personal desires of the ruler and beyond electoral interests.
It is an autarchy of the State whose raison d’être is to protect the national currency, and, as we know, there is no greater threat to a currency than inflation, which erodes its purchase value.
As the legislation changes in 2021, Lula is the first president not to nominate the president of the BC. Roberto Campos Neto was nominated by the previous government and has a mandate until next year.
On the other hand, the BC’s independence is limited, since it implements measures following discussions with other spheres of power, such as the National Monetary Council, which includes the Ministers of Finance and Planning. That is, although the BC is not subordinated to the federal government, it does not act completely independently either.
One of the functions of the BC is to define the basic interest rate, the Selic. It is argued that, with this rate at a low level, the economy would be stimulated. Theoretically yes, but there is no point in having a low Selic if there is no credibility in combating inflation.
In this case, long-term interest rates might rise sharply, which would have two perverse effects. First, the government would be forced to finance itself on shorter terms, worsening the public debt profile. Second, long-term private financing would disappear, impacting investments, which are the engine of the country’s growth.
Critics of the independent Central Bank seem to assume that inflation is neutral when it affects society as a whole. It is not. It affects everyone, yes, but not with the same intensity. The less favored suffer more with the rise in prices, as their income is destined almost exclusively to consumption. In fact, inflation is a well-known and perverse income transfer tool.
That is why the fight once morest inflation has a clear social dimension, which is not always perceived by the authorities. If the BC has enough autonomy to fulfill its main function, it will be contributing to the sustainable growth of the country.
To weaken the Central Bank, subordinating it to the government, is to weaken the fight once morest inflation, once morest the interests of precisely the most vulnerable part of society.
Camila Camargo and João Camargo are respectively the CEO and chairman of the board of the Esfera Brasil group.
Camila Camargo and Joao Camargo
